The Rolls-Royce (LSE: RR) share price has been struggling in the past year. One of the main reasons is that air travel has been reduced during the pandemic. The aerospace segment makes around 50% of the company’s revenues.
I would like to understand if it’s a good time to buy the stock after carefully analysing the company.
Why the Rolls-Royce share price might rise
The company began cost-reduction initiatives last year. It is the largest restructuring program in the company’s history. The management expects to save more than £1.3bn in annual costs. It further plans to sell off non-core assets in the next couple of years.
Covid-19 vaccination programs are progressing well in many parts of the globe. The air travel and the tourism sectors will gradually open. Recently, the President of the European Commission said that fully vaccinated Americans will be allowed to travel to Europe. This is positive for travel stocks and companies like Rolls-Royce, which benefits from increased air travel.
The company has good liquidity, which has been increased to £9bn. The management is confident that its liquidity is sufficient even for a “severe but plausible” downside scenario. Another positive thing is that most of the debt is long-dated. This will improve the cash balance. Also, it expects to be cash positive later this year. However, this will depend on air travel.
The bear case
The aerospace segment is competitive. It faces tough competition from companies like GE. The engines are usually sold at cost or for very little profit. The company makes money when it service the engines or by selling parts. However, that depends on flying hours. Now, with most of aircraft grounded this has caused a problem for the company.
Also, problems with the company’s Trent 1000 engine might also put some pressure on profits. The Trent 1000 engine powers Boeing‘s 787 aircraft. The turbine blades have been wearing faster than expected on some engines.
The company expects a cash outflow of £2bn in the year 2021. This year will also be a challenging year for the company. If Covid-19 cases increase then the figures might be even worse. This would further put downward pressure on the Rolls-Royce share price.
The company has planned for disposing of non-core assets. However, market sentiment is weak at the moment. So, any sales could take longer or the price achieved might be low. Also, it will need regulatory approvals from different governments. For example, Bergen Engines, a subsidiary of Rolls-Royce based in Norway, was supposed to be sold to a Russian company. However, the Norwegian government blocked the deal citing national security concerns.
Final view
I would consider buying Rolls-Royce shares in the coming months. I understand that this year might continue to be tough for the company. However, in the long term, I think the company can withstand challenges due to the management’s restructuring efforts and strong liquidity position.
